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U.S.A.: Justice Dept. Says U.S. Fraud Law Applicable in Iraq Contracts

The U.S. Justice Department gave critical support yesterday to whistle-blowers in a federal lawsuit against U.S. security contractor, Custer Battles.

by Griff WitteThe Washington Post
April 2nd, 2005

The Justice Department gave critical support yesterday to whistle-blowers in a federal lawsuit against a U.S. security contractor, concluding that the company can be held liable for allegedly defrauding authorities in Iraq of tens of millions of dollars.

The opinion came in response to a request by U.S. District Judge T.S. Ellis III, who had asked for the government's help in decoding a basic question at the heart of the case against Custer Battles LLC: Does federal fraud law apply when the contract was administered by the Coalition Provisional Authority, which governed Iraq for a year after the U.S. invasion. 

Custer Battles lawyers had argued that because the CPA was international, and because the money at stake was Iraqi and not American, accusations that the company defrauded the occupation authority didn't belong in U.S. courts.

Custer Battles was one of the first firms to enter Iraq after the invasion and quickly picked up a contract to secure Baghdad International Airport. Last year, the Air Force suspended the firm from receiving contracts, citing evidence of fraud.

While not taking a position on the truth of the alleged wrongdoing, the Justice brief concluded that anti-fraud law would apply because of the major role U.S. officials played in the CPA, and because U.S. authorities had seized much of the Iraqi money in question after the military victory there.

Ellis still has to rule in the matter.

Legal experts said the department's stand may open the door for other whistle-blower lawsuits against contractors operating in Iraq under the CPA. The Custer Battles case is the first of its kind to be unsealed.

"What this means is that, at least in the eyes of the Justice Department, contractors working in Iraq are not necessarily entitled to a free pass on actions that would have exposed them to liability in the U.S under the False Claims Act," said Steven L. Schooner, a professor of government contracting law at George Washington University.

The False Claims Act dates to the Civil War, allowing private citizens to sue on behalf of the government to recover money that's been fraudulently obtained. If a lawsuit succeeds, the defendants can be liable for up to three times the amount of the original fraud, and the whistle-blowers receive a percentage of the judgment.

The law was invoked last year against Custer Battles when two men who had worked for the company in Iraq claimed it had cheated the CPA out of tens of millions of dollars by funneling money through Cayman Islands subsidiaries and billing for nonexistent costs.

"As a taxpayer, I'm relieved to hear that the government is not going to simply walk away from all the fraud that was committed in Iraq," said Alan Grayson, the whistle-blowers' attorney.

Richard Sauber, an attorney for the company, said that the government brief was "disappointing."

"We don't believe the Justice Department's ruling was consistent with the language and spirit of the [False Claims Act]. And we have every hope that the court will agree with us."

Last fall, the Justice Department declined the option to join the case on behalf of the plaintiffs. Since then, political pressure has been building for the government to do something to demonstrate that contractors charged with cheating the CPA could face some form of sanction. Democrats in Congress heard witnesses on the matter in February, and Republican Sen. Charles E. Grassley (Iowa) wrote to Attorney General Alberto R. Gonzales urging him to find that the False Claims Act applied to cases involving the CPA.

Yesterday, Grassley expressed satisfaction with the department's brief. "The Justice Department's support for extending the False Claims Act in this matter is a step in the right direction," Grassley said in a written statement.

Grayson said the next step should be for the department to reconsider its decision not to intervene in the case. "What they should be doing is trying to recover the money," he said.

Custer Battles had operations in Fairfax and Rhode Island, but Sauber said the company is no longer operational because it was prohibited last year from receiving government contracts. "The Air Force suspension has effectively put them out of business," he said. "They have lost all their contracts and all their assets."





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